It’s not necessarily time to throw your growth plans out the window. But it is time to decide that growth at any cost isn’t worth it. Right now, your SaaS company should be focusing on positive cash flow and sustainable growth. In fact, even many investors are saying something similar to the companies in their portfolios.
So that you can better prioritize cash flow and sustainable growth, our team of SaaS finance experts recommends focusing on the following metrics:
Customer acquisition costs (CAC) payback
How long does it take you to pay back your customer acquisition costs (CAC)? Even if your customer base grows at a rapid clip, if it comes at a literal cost, you need to monitor it.
Not all customer acquisition costs money, but much of it does. And remember, this is not an economic climate in which your business should have a “growth at any cost” mentality.
So, how much does it cost to acquire customers from various channels (ad spend, sales and marketing team salaries, etc.)? And how long does it take your company to recoup that cost from that customer?
If the CAC payback is too long for a specific customer acquisition channel, it might not make sense to continue investing there — at least while the global economy is on unsure footing.
Lifetime value (LTV):CAC ratio
This measures a customer’s lifetime value (LTV) against their CAC. Obviously, you want this number to be well above 1, indicating that you’re earning a lot more from a customer than you spend on getting them in the first place. Ideally, you should have an LTV: CAC closer to 3.
To determine this ratio, you need to calculate lifetime value. To do that, multiply how much the average customer spends, how often they spend it, on average, and how long the average customer continues buying from your company.
Gross margin
To calculate your gross margin, find your revenue minus the cost of sale (e.g., hosting, infrastructure). Then divide that by gross revenue. If, for example, you have £500,000 in revenue for a given time period but the hosting and infrastructure costs to provide your service during that period were £100,000, your gross margin would equal 80%. And that means that for every pound you earn, you can reinvest £.80 in your company. That’s a solid number.
Many SaaS companies don’t have a gross margin that high. Calculate yours and find out how much of what you’re earning sticks around, versus how much needs to immediately head out the door in the form of expenses like AWS, etc.
Net revenue retention (NRR) rate
This one tells you a lot about your SaaS business, especially if you’re subscription-based. To calculate it, you look at all of your revenue over a certain time period minus the revenue churn during that period. That means that for the given time period, you total up:
- Recurring revenue at the start of the period, plus
- Expansion revenue, minus
- Downgrades, minus
- Cancellations
Then, take that sum and divide it by that recurring revenue from the start of the period. You want this percentage to be as high as possible. If you go over 100%, you’re in excellent shape.
Rule of 40
According to the rule of 40, your SaaS company’s recurring revenue growth rate over a period of time (usually, month over month or year over year) plus your profit margin (free cash flow) in that time period should be more than 40%.
This can be helpful for early-stage companies when profitability isn’t in the cards. If you’re growing fast enough and steadily enough, you may still be able to hit the rule of 40.
That said, a lot of companies don’t — so don’t panic. More than anything, this is a metric to monitor. You want to make sure you don’t start trending in the wrong direction.
Burn multiple
Your burn multiple equals your net burn divided by your net new recurring revenue for that time period.
So, let’s back up and talk net burn first. Start by figuring out your gross burn, which is your company’s total cash outflow during that time period. In other words, it’s your total operating cost in that period. To find your net burn rate, you subtract that gross burn rate from your net revenue. In other words, it’s your total cash loss (if any) in that time period.
Now, back to that burn multiple. By looking at net burn divided by net new recurring revenue, you get a way to measure how much growth is costing your SaaS company.
Magic number
In SaaS speak, the magic number is fairly similar to CAC in that it looks at how much it costs your business to get business. But instead of looking at the number of customers acquired, it evaluates how much money you actually earn from them.
Your magic number equals:
- Recurring revenue in the current quarter minus recurring revenue in the previous quarter
- That total multiplied by four
- That total divided by sales and marketing spend in the previous quarter
The sweet spot for your magic number is somewhere between 0.5 and 1.5, with the ideal anywhere between 1 and 1.5. Anything below 0.5 is a serious red flag that you’re spending too much on sales and marketing, while a magic number of greater than 1.5 shows you’re underinvesting in those areas.
Help tracking these metrics and more
Clearly, there are a lot of pulses on which founders should have their fingers. That doesn’t mean you need to spend all day crunching numbers, though. With outsourced CFO services, you can get someone to not just track these metrics, but also help you strategize around them.
If your SaaS company would benefit from that kind of support in these uncertain economic times, get in touch.
Recent Comments